Latvia: Economic and Political Outline

Economic Indicators

Since its independence from the former Soviet Union, Latvia has implemented market-oriented reforms. The country's economy has since then experienced a very good performance due to a constant growth in domestic consumption and the contribution of foreign investment. In addition, Latvia became a member of the EU on May 1st, 2004, and has benefited from large European subsidies. The country has officialized its membership of the Euro zone on the 1st of January 2014.

However, the country's economy showed signs of overheating between 2005-2007 and subsequently was strongly affected by the financial crisis of late 2008, its GDP had dropped of 17% and the unemployment rate reached 17% in 2010. After three years of recession, which placed the economy and the country's social fabric in jeopardy, the Latvian economy returned to strong growth in 2011 (+5.5%). Latvia was the fastest growing EU economy in 2012 with a growth of 5.1% of its economy. This trend was confirmed in 2013 with again the highest growth in the EU at 4%. The deep structural reforms undertaken as part of the assistance program provided jointly by the IMF and EU in 2008-2009 enabled Latvia to boost its exports, partly because of improved competitiveness. Latvia has a well trained and inexpensive workforce .

In the currently unfavourable European context, the country needs to continue working towards the consolidation of public finances and a return to price stability. Unemployment remained high (but decreased) in 2013 with 11.4% (against 15,2% in 2012) and the informal economy still represents nearly 30% of GDP in 2014. The government's target of a growth rate of 4% in 2013 was reached despite the deteriorating external environment of Latvia and the current rate of price increase. Only the weakness in investment (-7.7% in 2013) remain a handicap.

Latvia's goal is now to continue its economic recovery at a fast pace, using its participation to the Euro zone as well as the prospect of its entry in the OECD.

Main Indicators

2011

2012

2013

2014

2015 (e)

GDP (billions USD)

28.51

28.39

30.96

32.82

34.12

GDP (Constant Prices, Annual % Change)

5.3

5.2

4.1

2.7

3.2

GDP per Capita (USD)

13,742

13,886

15e

16,145

16,836

General Government Balance (in % of GDP)

-1.5

0.8

-0.9

-0.7

-0.7

General Government Gross Debt (in % of GDP)

37.5

36.4

35.0e

36.0e

35.3

Inflation Rate (%)

4.2

2.3

0.0

0.7

1.6

Unemployment Rate (% of the Labor Force)

16.2

15.0

11.9

10.3

9.7

Current Account (billions USD)

-0.61

-0.71

-0.25

-0.03

-0.50

Current Account (in % of GDP)

-2.1

-2.5

-0.8

-0.1

-1.5

Source:
IMF - World Economic Outlook Database
, Last Available Data

Note: (e) Estimated Data

Main Sectors of Industry

The agricultural sector contributes about 4.9% to the GDP and employs over 11% of the population. It is dominated by cattle breeding, in addition to the production of grain, sugar beets, potatoes and vegetables. Apart from timber, which is largely exported, Latvia has almost no natural resources. The country has to import all its energy products, mainly from Russia. Fishing and forestry are also important parts of its primary sector.

The industrial sector has contributed about 25.7% to the GDP and employed about 25% of the workforce in 2013. The construction, metallurgy, industrial food-processing, and mechanical engineering sectors are booming. Latvia is well known as an important producer of railway equipment, radios, refrigerators, medication, wood and steel products.

The Latvian economy is driven by the services sector which contributes more than 69.4% to the GDP and employs over 64% of the Latvian active population. Thanks to attractive fiscal regulation, Latvia has developed a large financial services sector. The country offers a corporation tax rate of 15%, one of the lowest within the European Union.

Indicator of Economic Freedom

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labor freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.

Business environment ranking

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Country Risk

Foreign Trade in Figures

The Latvian market is open and competitive. The EU, of which Latvia has been a member since 2004, is its largest trade partner, followed by Russia.

With its 530 km-long Baltic coastline, Latvia is bordered by Belarus and Russia to the east, Estonia to the north and Lithuania to the south. Its position allows it to function as a bridge between the two major economic areas of the EU and the CIS. In terms of foreign trade, Latvia's main customers in 2013 have been Lithuania (over 15% of exports), Estonia, Russia and Germany.The country exports mainly wood and coal, mineral fuels & oils, iron and steel, machinery and electrical and electronic equipment.

Imports, which dropped by 50% since the 2008 crisis, resumed in 2011. Its main suppliers are Lithuania (16% of imports), Germany, Russia, Poland and Estonia. Latvia mainly imports machinery, chemicals, fossil fuel and electricity and vehicles.

Foreign Trade Indicators

2009

2010

2011

2012

2013

Imports of Goods (million USD)

9,793

11,691

16,290

17,228

17,628

Exports of Goods (million USD)

7,699

9,533

13,131

14,094

14,511

Imports of Services (million USD)

2,240

2,183

2,616

2,595

2,687

Exports of Services (million USD)

3,782

3,644

4,443

4,495

4,828

Imports of Goods and Services (Annual % Change)

-33.5

8.6

-

-

-

Exports of Goods and Services (Annual % Change)

-14.1

10.3

-

-

-

Imports of Goods and Services (in % of GDP)

45.4

55.2

62.7

-

-

Exports of Goods and Services (in % of GDP)

43.9

53.8

58.8

-

-

Trade Balance (million USD)

-1,992

-1,847

-3,241

-3,076

-2,921

Trade Balance (Including Service) (million USD)

-255

-210

-1,231

-1,019

-573

Foreign Trade (in % of GDP)

89.3

109.0

121.5

-

-

Source:
WTO - World Trade Organization
; World Bank
, Last Available Data

Political Outline

Executive Power

The President is the head of state and is elected by the parliament in a separate election for a four year term. The President is the commander-in-chief of the armed forces. He appoints the Prime Minister as head of the government who, in turn, has to receive a vote of confidence from the parliament and serves a four year term. The Prime Minister enjoys the executive powers which include implementation of the law in the country and running the day-to-day affairs. The Council of Ministers is nominated by the Prime Minister and appointed by the Parliament.

Legislative Power

The legislature in Latvia is unicameral. The Parliament consists of 100 seats; its members are elected by direct popular vote to serve four-year terms. This parliament is called Saeima.

The executive branch of government is directly or indirectly dependent on the support of the parliament, often expressed through a vote of confidence. Legislative power is vested in both the government and the parliament. The government does not have the power to dissolve the parliament. The people of Latvia enjoy considerable political rights.

Main Political Parties

Latvia has a multi-party system, where no one party has a chance of gaining power alone, and parties must work with each other to form coalition governments. The major parties in the country are: - JL (New Era Party) - TP (People's Party) - LPP (First Party of Latvia) - ZZS (Latvian Green Party) - TB/LNNK (For the Fatherland and Freedom)

Indicator of Freedom of the Press

The world rankings, published annually, measures the violations of press freedom worldwide. It reflects the degree of freedom enjoyed by journalists, the media and digital citizens of each country and the means used by states to respect and uphold this freedom. Finally, a note and a position are assigned to each country. To compile this index, Reporters Without Borders (RWB) prepared a questionnaire sent to partner organizations,150 RWB correspondents, journalists, researchers, jurists and activists of human rights, including the main criteria - 44 in total - to assess the situation of press freedom in a given country. It includes every kind of direct attacks against journalists and digital citizens (murders, imprisonment, assault, threats, etc.) or against the media (censorship, confiscation, searches and harassment etc.).

Indicator of Political Freedom

The Indicator of Political Freedom provides an annual evaluation of the state of freedom in a country as experienced by individuals. The survey measures freedom according to two broad categories: political rights and civil liberties. The ratings process is based on a checklist of 10 political rights questions (on Electoral Process, Political Pluralism and Participation, Functioning of Government) and 15 civil liberties questions (on Freedom of Expression, Belief, Associational and Organizational Rights, Rule of Law, Personal Autonomy and Individual Rights). Scores are awarded to each of these questions on a scale of 0 to 4, where a score of 0 represents the smallest degree and 4 the greatest degree of rights or liberties present. The total score awarded to the political rights and civil liberties checklist determines the political rights and civil liberties rating. Each rating of 1 through 7, with 1 representing the highest and 7 the lowest level of freedom, corresponds to a range of total scores.